Can Wage Subsidies Boost Employment in the Wake of an Economic Crisis? Evidence from Mexico

Miriam Bruhn

doi:10.1080/00220388.2020.1715941

Abstract

This paper measures the employment effect of a programme in Mexico that granted firms wage subsidies during the recent economic crisis. I use monthly administrative data at the industry level, along with Euclidean distance matching to construct groups of eligible and ineligible durable goods manufacturing industries that display statistically identical preprogramme trends in employment. Difference-in-difference results show a positive but not statistically significant effect of the wage subsidies on employment during the programme’s eight-month duration. The size of the effect increases to 18 per cent after the programme ended and the results indicate that employment after the programme recovered faster in eligible industries than in ineligible industries. Additional analysis suggests that the programme did not incentivise firms to retain workers with job-specific skills as originally intended. Instead, the payment of subsidy funds, which only happened towards the end of the programme, seems to have provided liquidity for hiring back workers.

Highlights

The rise in unemployment during an economic crisis poses a significant concern to policy makers
22 countries around the world used some form of wage subsidy program to promote employment retention during the recent economic crisis
Rising unemployment during an economic crisis is a concern for policy makers and 22 countries around the world used some form of wage subsidy program to promote employment retention during the recent economic crisis

Summary

Introduction

The rise in unemployment during an economic crisis poses a significant concern to policy makers. Layoffs could slow down the economic recovery, since re‐hiring and training workers may be costly for firms. This is true for workers who have acquired job‐specific skills. For these workers, it may be beneficial for firms to not let them go in the first place. There could be a case for government intervention through wage subsidies, which could limit layoffs and speed up economic recovery by eliminating search and training costs. 22 countries around the world used some form of wage subsidy program to promote employment retention during the recent economic crisis.

Results

Discussion

Conclusion